March 21, 2019 - Douglas Myser

Here's a better way to tax the rich. Ocasio-Cortez's recent proposal to create a 70% tax bracket on income over $10 million will not become law anytime soon due to Republican opposition. But the proposal, which would only affect fewer than one in every 1,000 households, has sparked a long overdue discussion about taxing the wealthy. Raising taxes on the rich is the right idea at the right time, but some ways to do so are better that others. Here's a better way to tax the rich.

Why should the rich pay more than they already do ? First, we need the money, and higher taxes are the only way to get wealthy Americans to bear non-trivial amounts of the fiscal burden. Currently, the economy is at full employment, but the government is running substantial deficits. Low revenues are a big part of the problem: they do not come close to funding current spending. As an aging population pushes up Social Security and Medicare Spending in the future, both projected deficits and the need for higher revenue will increase, even if policymakers cut spending somewhat. Here's a better way to tax the rich.

Second, high income households have enjoyed skyrocketing incomes over the past 40 years, but their average tax rates have remained relatively constant. From1979 to 2015,, average market income for those in the top 1% rose by 233%, from $552,000 to $1.84 million, in 2015 dollars. But federal taxes as a share of their income have fallen--from 35% in 1979 to 33% in 2015--and the 2017 tax cuts reduced them further. In a progressive system like ours, the tax share of income should rise as income rises. High income households are due for a significant increase in tax burdens.

Third, higher tax burdens on the wealthy would reduce rent seeking, what economists call the appropriation of wealth from others wihtout creating new wealth. Studies have shown that countries with lower top marginal tax rates have higher pre-tax income inequality. That would also help with those who have tax debt, by apportioning more income to ore people. Those who do have IRS tax debts can always contact a Tax Resolution firm for tax help. Ask about the IRS Fresh Start Program.